A Solution to the Financial Crisis? Sharia!

Italian economist Loretta Napoleoni (of Rogue Economics fame), blames the lingering financial crisis in part on the American War on Terrorism, which inaugurated an allegedly “suspicious attitude…toward Muslim investors.” She goes further though, and argues that the only solution to the turmoil lies in embracing the financial rules mandated by the doctrines of medieval Islamic Sharia:

Islamic finance is a system based in shariah law. Central principals include a prohibition against charging interest and a code of ethics for investments – for example, barring investments in prostitution. Napoleoni said these principals are actually quite similar to the principles of classical economics.

“A bank should be a profit organization, but the moment in which the social role is forgotten and the profit role takes over, then a bank is actually working against the people who are putting their money into the bank, the clients. Now that, of course, in Islamic finance could not happen, because there is this partnership between the client and the banks. There is a social commitment within finance which we had before, but we lost it.”
(UNM)

Makes sense. When you’re looking for lessons in the administration of an advanced, adaptive, and sophisticated modern financial system, clearly we have a lot to learn from economic titans like Yemen. Lately financial sharia in that country has produced a permanently premodern economy with 40 times the population of Vermont, subsisting on about 80% of Vermont’s annual GSP. Sounds like a good deal to me.

But up to this point I was just kind of blinking at Ms. Napoleoni’s obviously quite deranged views. I was unaware for instance that prostitution rings were able to engage in formal corporate finance in the United States, or that charging interest to people with government support (on “social commitment” grounds) who couldn’t make zero interest payments anyway, was the real source of the home loan debacle. Inevitably I began wondering if there could be some ulterior motive to explain such nonsense. I wasn’t long in waiting:

Another lesson from the Islamic system is striking a balance between flexibility and oversight. All Islamic bonds must be approved by a committee of scholars and bankers. At the same time, the bonds can be used to finance anything within the limits of shariah law.
(UNM)

Where on earth could we ever find these infallible academics to guard us from the unchecked villainy of bankers? Perhaps Loretta Napoleoni the academic, might have a shortlist ready, no? It’s possibly an oversight on her part, but we could naturally exclude her from consideration for such a position, since married women are traditionally prohibited from exercising authority over property under sharia (not to mention that Islamic teaching is famously rather dismissive of the wisdom of her gender overall). To be consistent with her advice, we should really just stop listening to her.

But perhaps this is a bit like the long standing trouble with case studies in Marxist theory. Upon pointing out to the Marxist that every application of his theory tends to produce a despotic militaristic dictatorship like the Soviet Union or North Korea, the Marxist will protest that he didn’t mean that kind of Marxism. He meant his own private Marxism, the one that conveinantly doesn’t exist for disproof. Let’s hope Ms. Napoleoni’s preposterous Western-Islamic financial system remains a country for a similarly fictional and nebulous realm.